Vanguard readies small-cap fund

New managers also named for several portfolios

JohnSpence

BOSTON (MarketWatch) -- Small stocks may soon get a wider berth at the Vanguard Group.

The Valley Forge, Pa.-based mutual-fund giant on Wednesday said it plans to introduce a new fund focusing on small-cap stocks. Vanguard also announced management changes at several existing funds.

The biggest U.S. fund firm said it filed a registration statement with the Securities and Exchange Commission for an actively managed offering investing in small U.S. companies, to be called Vanguard Strategic Small-Cap Equity Fund.

The fund will be "quantitatively" managed, meaning Vanguard will put computer-driven models to work to sift companies with attractive growth prospects relative to peers, with an eye on valuations.

Initial investment minimums will be pegged at $3,000, and fees will total 0.40% of assets, Vanguard said. The average small-cap blend fund levies an expense ratio of roughly 1.5%, according to investment researcher Morningstar Inc. Vanguard expects to introduce the fund in the second quarter pending regulatory approval.

Vanguard is introducing the fund after small-cap stocks have consistently outperformed larger rivals since the 2000 U.S. market downturn. In the past five years, small-cap blend funds, for example, have returned 10.9% on average, while large-cap blend funds have a five-year annualized return of 0.6%, according to Morningstar.

"It's not an auspicious time to roll out a small-cap fund, so investors should keep their expectations in check since small-caps may be in for a breather," said Sonya Morris, a Morningstar fund analyst.

Vanguard's new fund will join $11 billion Vanguard Explorer Fund
VEXPX, -0.14%
which is multi-managed, in the firm's actively managed small-cap lineup. Morris said the planned fund could be a "good alternative" to Explorer, which she has concerns about given its large asset base.

Vanguard said the planned fund will use a similar strategy as $5.6 billion Vanguard Strategic Equity Fund
VSEQX, +0.00%
which is managed by Vanguard's Quantitative Equity Group.

The Strategic Equity Fund is designed to mirror the risk characteristics of an index of small-cap and midcap stocks. The fund's investment models seek the best companies within a given market sector and overweight them in the portfolio. The pending Vanguard fund will also focus on these smaller stocks.

"The new fund will be playing in different space, but you can make some assumptions about how it might perform by looking at Strategic Equity Fund," Morris said.

"[Strategic Equity] doesn't try blow the competition out of water, but rather deliver slow and steady outperformance with a long-term strategy," she added.

Since Strategic Equity's inception in 1995, the fund has posted annualized returns of 13.8%, compared with 12.1% for its benchmark, according to Vanguard.

James Stetler, a principal in the "quant" group who manages a portion of Vanguard Morgan Growth
VMRGX, +0.46%
and Vanguard Equity Income
VEIPX, +0.61%
will manage the new small-cap fund.

Morningstar's Morris said the quant team has been increasingly called on to supplement Vanguard's multi-managed funds given the group's solid track record, and because it largely relies on computer models the group has a greater ability to run large amounts of money.

Manager changes

Separately, Vanguard on Wednesday announced new management at several other funds.

The Vanguard spokeswoman said Wellington, a Boston-based firm which sub-advises several Vanguard funds, suggested providing Kilbride with the opportunity to manage the fund, which Vanguard saw as a good fit. Asked if Butler had left Wellington and to explain the reasons behind the switch, a spokeswoman for the privately held firm declined to comment, citing company policy.

Also, Vanguard said James Troyer will succeed Joel Dickson as portfolio manager at Strategic Equity Fund.

Dickson will direct Vanguard's active quantitative equity management and research teams, Vanguard said. The company added that it expects that Troyer and Stetler will eventually assume portfolio-management duties for all of Vanguard's quantitative mandates.

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